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Activity-Based Costing: A Comprehensive Guide with Exercises and Questions, Study notes of Cost Accounting

University of Mindanao (UM)Cost Accounting

Cost accounting| Lecture notes| exam notes Cost accounting| Lecture notes| exam notes

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2021/2022

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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
MANAGEMENT ADVISORY SERVICES
ACTIVITY-BASED COSTING
THEORY
1. An accounting system that collects financial and operating data on the basis of the underlying
nature and extent of the cost drivers is
a. Direct costing. c. Cycle-time costing.
b. Activity-based costing. d. Variable costing.
2. The resource utilized by a given product divided by the total amount of the resource available
is called the
a. Activity driver. c. Cost object.
b. Consumption ratio. d. Sustaining activity.
3. Which of the following statements is true?
a. The traditional approach to costing uses many different cost drivers.
b. Costs that are indirect to products are by definition traceable directly to products.
c. Costs that are indirect to products are traceable to some activity.
d. All of the above statements are true.
4. Mass customization can be achieved through the use of
a. Activity-based costing. c. Flexible manufacturing systems.
b. just-in-time inventory. d. all of the above.
5. Process value analysis is a key component of activity-based management that links product
costing and
a. Reduction of the number of cost pools.
b. Continuous improvement.
c. Accumulation of heterogeneous cost pools.
d. Overhead rates based on broad averages.
6. An approach to developing new ways to perform existing activities is called
a. Process value analysis. c. Caveat analysis.
b. Re-engineering. d. Benchmarking.
7. A(n) _______________ method first traces costs to a department and then to products.
a. direct costing c. traditional costing
b. absorption costing d. activity-based costing
8. A(n)_______________ method first traces costs to activities and then to products.
a. direct costing c. traditional costing
b. absorption costing d activity-based costing
9. Uniformly assigning the costs of resources to cost objects when those resources are actually
used in a nonuniform way is called
a. overcosting. c. peanut-butter costing.
b. undercosting. d. department costing.
10. An objective of activity-based management is to
a. eliminate the majority of centralized activities in an organization.
b. reduce or eliminate non-value-added activities incurred to make a product or provide a
service.
c. institute responsibility accounting systems in decentralized organizations.
d. all of the above
MSQ-12
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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila MANAGEMENT ADVISORY SERVICES ACTIVITY-BASED COSTING THEORY

  1. An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is a. Direct costing. c. Cycle-time costing. b. Activity-based costing. d. Variable costing.
  2. The resource utilized by a given product divided by the total amount of the resource available is called the a. Activity driver. c. Cost object. b. Consumption ratio. d. Sustaining activity.
  3. Which of the following statements is true? a. The traditional approach to costing uses many different cost drivers. b. Costs that are indirect to products are by definition traceable directly to products. c. Costs that are indirect to products are traceable to some activity. d. All of the above statements are true.
  4. Mass customization can be achieved through the use of a. Activity-based costing. c. Flexible manufacturing systems. b. just-in-time inventory. d. all of the above.
  5. Process value analysis is a key component of activity-based management that links product costing and a. Reduction of the number of cost pools. b. Continuous improvement. c. Accumulation of heterogeneous cost pools. d. Overhead rates based on broad averages.
  6. An approach to developing new ways to perform existing activities is called a. Process value analysis. c. Caveat analysis. b. Re-engineering. d. Benchmarking.
  7. A(n) _______________ method first traces costs to a department and then to products. a. direct costing c. traditional costing b. absorption costing d. activity-based costing
  8. A(n)_______________ method first traces costs to activities and then to products. a. direct costing c. traditional costing b. absorption costing d activity-based costing
  9. Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called a. overcosting. c. peanut-butter costing. b. undercosting. d. department costing.
  10. An objective of activity-based management is to a. eliminate the majority of centralized activities in an organization. b. reduce or eliminate non-value-added activities incurred to make a product or provide a service. c. institute responsibility accounting systems in decentralized organizations. d. all of the above

MSQ-

  1. Symptoms of an outdated cost system include all of the following EXCEPT a. product costs change because of changes in financial reporting. b. products that are difficult to produce show little profit. c. competitors’ prices appear unrealistically low. d. the company has a highly profitable niche all to itself.
  2. Traditional overhead allocations result in which of the following situations? a. Overhead costs are assigned as period costs to manufacturing operations. b. High-volume products are assigned too much overhead, and low-volume products are assigned too little overhead. c. Low-volume products are assigned too much, and high-volume products are assigned too little overhead. d. The resulting allocations cannot be used for financial reports.
  3. Traditionally, managers have focused cost reduction efforts on a. activities. b. processes. c. departments. d. costs.
  4. Which of the following is NOT a trait of a traditional cost management system? a. unit-based drivers c. allocation intensive b. focus on managing activities d. narrow and rigid product costing
  5. Unit-level cost drivers are most appropriate as an overhead assignment base when a. several complex products are manufactured. b. only one product is manufactured. c. direct labor costs are low. d. factories produce a varied mix of products.
  6. Which of the following is NOT a sign of poor cost data? a. Competitors’ prices for high-volume products appear much too high. b. The company seems to have a highly profitably niche all to itself. c. Customers don’t balk at price increases for low-volume products. d. Competitors’ prices for low-volume products appear much too high.
  7. In Activity-based Costing, which of the following would be considered a value-added activity? a. Repair of machines. c. Bookkeeping. b. Engineering designs. d. Storage of inventory.
  8. In the pharmaceutical or food industries, quality control inspections would most likely be viewed as a. non-value-added activities. c. value-added-activities. b. business-value-added activities. d. process-efficiency activities.
  9. A basic assumption of activity-based costing (ABC) is that a. All manufacturing costs vary directly with units of production. b. Products or services require the performance of activities, and activities consume resources. c. Only costs that respond to unit-level drivers are product costs. d. Only variable costs are included in activity-cost pools.
  10. Activity-based costing and generally accepted accounting principles differ in that ABC a. does not define product costs in the same manner as GAAP. b. cannot be used to compute an income statement, but GAAP can. c. is concerned only with costs generated from automated processes, but GAAP is concerned with costs generated from both manual and automated processes. d. information is useful only to managers, while GAAP information is useful to all organizational stakeholders.

MSQ-

  1. What is the normal effect on the numbers of cost pools and allocation bases when an activity- based cost (ABC) system replaces a traditional cost system? a. b. c. d. Cost Pools No effect Increase No effect Increase Allocation Bases No effect No effect Increase Increase
  2. Book Co. uses the activity-based costing approach for cost allocation and product costing purposes. Printing, cutting, and binding functions make up the manufacturing process. Machinery and equipment are arranged in operating cells that produce a complete product starting with raw materials. Which of the following are characteristic of Boo’s activity-based costing approach? I. Cost drivers are used as a basis for cost allocation. II. Costs are accumulated by department or function for purposes of product costing. III. Activities that do not add value to the product are identified and reduced to the extent possible. a. I only. b. I and II. c. I and III. d. II and III.
  3. The ideal standard quantity for nonvalue-added activities is a. the cost of resources acquired in advance of usage b. practical capacity c. the currently attainable quantity standard d. zero
  4. Examples of activities at the unit level of costs include: A. cutting, painting, and packaging C. designing, changing, and advertising B. scheduling, setting up, and moving D. heating, lighting, and security
  5. _____ are those that a company performs when it makes a group of units. a. Batch-level activities. c. Sustaining activities. b. Facility-sustaining activities. d. Unit-level activities.
  6. Examples of activities at the batch level of costs include: A. cutting, painting, and packaging C. designing, changing, and advertising B. scheduling, setting up, and moving D. heating, lighting, and security
  7. If JIT manufacturing is used, maintenance of the production equipment would be classified as a a. unit-level activity c. cell-level activity b. product-level activity d. facility-level activity
  8. Which of the following is not a type of sustaining activity? a. Capacity-sustaining. c. Distribution-channel sustaining. b. Customer-sustaining. d. Unit-sustaining.
  9. Testing a prototype of a new product is an example of a a. Unit-level activity. c. Product-level activity. b. Batch-level activity. d. Organization-sustaining activity.
  10. Examples of activities at the product level of costs include: A. cutting, painting, and packaging C. designing, changing, and advertising B. scheduling, setting up, and moving D. heating, lighting, and security
  11. In allocating variable costs to products, a. a volume-based cost driver should be used. b. direct labor hours should always be used as the allocation base. c. a company should use the same allocation base that it uses for fixed costs. d. a company should never use more than one cost driver.

MSQ-

  1. The following items are used in tracing costs in an ABC system. In which order are they used? (1) cost object (2) cost driver (3) activity driver (4)cost pool a. 1, 2, 3, 4 b. 2, 3, 4, 1 c. 2, 4, 3, 1 d. 4, 3, 1, 2
  2. _____ relate to an entire plant as a whole. a. Batch-level activities. c. Sustaining activities. b. Facility-sustaining activities. d. Unit-level activities.
  3. Examples of activities at the plant level of costs include: A. cutting, painting, and packaging C. designing, changing, and advertising B. scheduling, setting up, and moving D. heating, lighting, and security
  4. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a a. mixed cost. b. predictor. c. direct cost. d. cost driver.
  5. Which of the following is typically regarded as a cost driver in traditional accounting practices? a. number of purchase orders processed c. number of transactions processed b. number of customers served d. number of direct labor hours worked
  6. A cost pool is a. All of the costs of a particular department. b. All costs in a group such as variable costs or discretionary fixed costs. c. All costs related to a product or product line. d. All costs that have the same driver.
  7. The activities that drive resource requirements are called the a. Activity drivers. c. Resource drivers. b. Cost objects. d. Sustaining activities.
  8. __________________ are causal factors that explain the consumption of overhead. a. Activity drivers b. Cost pools d. Cost catchers c. Cost objectives
  9. All of the following are unit-based activity drivers EXCEPT a. machine hours b. number of setups c. number of units d. direct labor hours
  10. All of the following are nonunit-based activity drivers EXCEPT a. number of setups c. number of inspections b. number of direct labor hours d. number of material moves
  11. In an activity-based costing system, what should be used to assign a department’s manufacturing overhead cost to products produced in varying lot sizes? a. A single cause and effect relationship. c. Relative net sales values of the products. b. Multiple cause and effect relationships. d. A product’s ability to bear cost allocations.
  12. In activity-based costing, preliminary cost allocations assign costs to a. departments. b. processes. c. products. d. activities.
  13. In activity-based costing, final cost allocations assign costs to a. departments. b. processes. c. products. d. activities. PROBLEMS
  14. A time-and-motion study revealed that it should take 1 hour to produce a product that currently takes 3 hours to produce. Labor is $8 per hour. Nonvalue-added costs are a. $8 b. $16 c. $24 d. $

MSQ-

  1. How much cost, in total, would be allocated in the first-stage allocation to the Customer Support activity cost pool? a. $389,500 b. $615,000 c. $164,000 d. $494,
  2. ALF Co. is an assisted-living facility that provides services in the form of residential space, meals, and other occupant assistance (OOA) to its occupants. ALF currently uses a traditional cost account system that defines the service provided as assisted living, with service output measured in terms of occupant days. Each occupant is charged a daily rate equal to ALF’s annual cost of providing residential space, meals and OOA divided by total occupant days. However, an activity-based costing (ABC) analysis has revealed that occupant’s use of OOA varies substantially. This analysis determined that occupants could be grouped into three categories (low, moderate, and high usage of OOA) and that the activity driver of OOA is nursing hours. The driver of the other activities is occupant days. The following quantitative information was also provided: Occupant category Annual Occupant Days Annual Nursing Hours Low Usage 36,000 90, Medium Usage 18,000 90, High Usage 6,000 120, 60,000 300, The total annual cost of OOA was $7.5 million, and the total annual cost of providing residential space and meals was $7.2 million. Accordingly, the ABC analysis indicates that the daily costing rate should be a. $182.50 for occupants in the low-usage category. b. $145.00 for occupants in the medium-usage category. c. $245.00 for occupants in the high-usage category. d. $620.00 for all occupants. Questions 10 through 13 are based on the following information. Zebra Corporation has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees, and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: Salaries $150, Equipment 80, Supplies 20, Total $250, The equipment is used for two activities: improving processes and designing tooling. Thirty-five percent of the equipment’s time is used for improving processes and sixty-five percent is used for designing tools. The salaries are for two engineers. One is paid $100,000, while the other earns $50,000. The $100,000 engineer spends 40% of his time training employees in new processes and 60% of his time on improving processes. The remaining engineer spends equal time on all activities. Supplies are consumed in the following proportions: Creating BOMs 25% Studying capabilities 10% Improving processes 20% Training employees 25% Designing tooling 20%
  3. What is the cost assigned to the creating BOMs activity? a. $62,500 b. $15,000 c. $87,500 d. $250,
  4. What is the cost assigned to the improving processes activity? a. $250,000 b. $50,000 c. $87,500 d. $102,
  5. What is the cost assigned to the training employees activity? a. $55,000 b. $250,000 c. $62,500 d. $162,
  6. What is the cost assigned to the designing tooling activity? a. $162,500 b. $66,000 c. $50,000 d. $250,

MSQ-

Questions 14 through 16 are based on the following information. A company has identified the following overhead costs and cost drivers for the coming year. Overhead Item Cost Driver Budgeted Cost Budgeted Activity Level Machine setup No. of setups $ 20,000 200 Inspection No. of inspections $130,000 6, Material handling No. of material moves $ 80,000 8, Engineering Engineering hours $ 50,000 1, $280, The following information was collected on three jobs that were completed during the year: Job 101 Job 102 Job 103 Direct materials $5,000 $12,000 $8, Direct labor $2,000 $ 2,000 $4, Units completed 100 50 200 Number of setups 1 2 4 Number of inspections 20 10 30 Number of material moves 30 10 50 Engineering hours 10 50 10 Budgeted direct labor cost was $100,000, and budgeted direct material cost was $280,000.

  1. If the company uses activity-based costing, how much overhead cost should be allocable to Job 101? a. $1,300 b. $2,000 c. $5,000 d. $5,
  2. If the company uses activity-based costing, compute the cost of each unit of Job 102. a. $340 b. $392 c. $440 d. $
  3. The company prices its products at 140% of cost. If the company uses activity-based costing, the price of each unit of Job 103 would be a. $98 b. $100 c. $116 d. $ Questions 17 thru 22 are based on the following information Special Products recently installed an activity-based relational data base. Using the information contained in the activity relational table, the following pool rates were computed: $200 per purchase order $12 per machine hour, process A $15 per machine hour, process B $40 per engineering hour Two products are produced by Special Products: A and B. Each product has an area in the plant that is dedicated to its production. The plant has two manufacturing processes, process A and process B. Other processes include engineering, product handling and procurement. The product relational table for Special is as follows: Activity Driver # Name Activity Usage Product A Product B 1 Units 200,000 25, 2 Purchase orders 250 125 3 Machine hours 80,000 10, 4 Engineering hours 1,250 1,
  4. How much overhead cost will be assigned to product A using the number of purchase orders? a. $50,000 b. $25,000 c. $40,000,000 d. $66,
  5. How much overhead cost will be assigned to product B using engineering hours? a. $50,000 b. $60,000 c. $1,000,000 d. $400,
  6. How much overhead cost will be assigned to product A using process A? a. $1,200,000 b. $2,400,000 c. $960,000 d. $120,
  7. How much overhead cost will be assigned to product B using process B? a. $1,200,000 b. $960,000 c. $120,000 d. $150,

MSQ-

TV Board PC Board Direct materials $80 $ Direct labor 1.5 hours 4.0 hours Machine time 0.5 hours 1.5 hours Variable factory overhead is applied on the basis of direct labor hours. For 1993, variable factory is budgeted at $1,120,000, and direct labor hours are estimated at 280,000. The hourly rates for machine time and direct labor are $10 and $14, respectively. Alaire applies a material handling charge at 10% of materials cost, thus materials handling charge is not included in variable factory overhead. Total 1993 expenditures for materials are budgeted at $10,600,000. Ed Watch, Alaire’s controller, believes that, the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, they should consider the activities involved in the production. As Welch explained to the group, “Activity-based costing integrates the cost of all activities, known as cost drivers, into individual product costs rather than including these costs in overhead pools.” Welch has prepared the schedule shown below to help the management group understand this concept. “Using this information,” Welch explained, “we can calculate an activity-based cost for each TV board and each PC board and then compare it to the standard cost we have bee using. The only cost that remains the same for both cost methods is the cost of direct materials. The cost drivers will replace the direct labor, machine time, and overhead costs in the standard cost.” Budgeted Cost Cost Driver Annual Activity for Cost Driver Materials overhead: Procurement $400,000 No. of parts 4,000,000 parts Production scheduling 220,000 No. of boards 110,000 boards Packaging & shipping 440,000 No. of boards 110,000 boards $1,060, Variable overhead: Machine setup $446,000 No. of setups 278,750 setups Hazardous waste disposal 48,000 Lbs. of waste 16,000 lbs. Quality control 560,000 No. of inspections 160,000 inspect’ns General supplies 66,000 No. of boards 110,000 boards $1,120, Manufacturing: Machine insertion $1,200,000 No. of parts 3,000,000 parts Manual insertion 4,000,000 No. of parts 1,000,000 parts Wave soldering 132,000 No. of boards 110,000 boards $5,332, Required per unit TV Board PC Boards Parts 25 55 Machine insertions 24 35 Manual insertions 1 20 Machine setups 2 3 Hazardous waste 0.02 lbs. 0.35 lbs. Inspections 1 2

  1. On the basis of standard costs, the total contribution budgeted for the TV board is a. $1,950,000 b. $2,275,000 c. $2,340,000 d. $2,470,
  2. On the basis of activity-based costs (ABC), the total contribution budgeted for the TV board is a. $1,594,000 b. $1,950,000 c. $2,037,100 d. $2,557,
  3. On the basis of standard costs, the total contribution budgeted for the PC board is a. $3,000,000 b. $2,960,000 c. $2,920,000 d. $2,360,
  4. On the basis of activity-based costs, the total contribution budgeted for the PC board is a. P1,594,000 b. $1,950,000 c. $2,360,000 d. $2,557,

MSQ-

Answer Key Theory

  1. B 11. B 21. C 31. D 41. A 51. B
  2. B 12. B 22. C 32. C 42. C 52. B
  3. C 13. D 23. B 33. D 43. B 53. D
  4. C 14. B 24. D 34. A 44. D 54. C
  5. B 15. B 25. B 35. A 45. D
  6. B 16. A 26. B 36. B 46. D
  7. C 17. B 27. B 37. C 47. D
  8. D 18. C 28. D 38. D 48. C
  9. C 19. B 29. A 39. C 49. A
  10. B 20. A 30. D 40. C 50. B Problems
  11. B 11. D 21. D
  12. D 12. A 22. A
  13. C 13. B 23. D
  14. D 14. A 24. A
  15. D 15. A 25. B
  16. A 16. A 26. A
  17. B 17. A 27. A
  18. D 18. B 28. D
  19. A 19. C 29. D
  20. B 20. D 30. A

MSQ-